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November 7–8, 2018
Authorized for Public Release
187 of 236
Appendix 1: Materials used by Ms. Zobel, Mr. Schulhofer-Wohl, Ms. Senyuz, and
Mr. Doyle
November 7–8, 2018
Authorized for Public Release
188 of 236
Class I FOMC - Restricted Controlled (FR)
Material for Briefing on
Long-Run Monetary Policy Implementation
Frameworks
Patricia Zobel, Sam Schulhofer-Wohl, Zeynep Senyuz, and
Brian Doyle
Exhibits by Carolyn Shen and Alex Thorp
November 7, 2018
November 7–8, 2018
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
189 of 236
Exhibit 1
(1) Key Takeaways
Banks' liquidity management practices have changed
markedly since the crisis
(2) Actual and Projected System Reserve Level
At current rates relative to IOER, minimum reserve
demand is likely higher than pre-crisis, but much lower
than the peak reserve level of $2.8 trillion
Estimate from the SFOS suggests minimum
reserve demand of around $800 billion
o Currently no broad-based signs of unmet
reserve need; staff will continue to monitor
3,000
3,000
2,500
2,500
2,000
2,000
1,500
1,500
500
0
0
1/2011
1/2013
1/2015
1/2017
1/2019
Source: H.4.1 report: 'Other Deposits held by Depository
Institutions', staff projections
(4) System Reserve Level and SFOS Estimate of
Minimum Reserve Demand
$ billions
2,000
U.S. GSIB
Large
Domestic
Small
Domestic
FBO
63%
44%
83%
62%
63%
69%
100%
33%
3) Reserve Requirements
50%
38%
83%
43%
800
Internal Liquidity Stress
4)
Tests
75%
63%
50%
71%
400
Potential Deposit
Outflows
Actual Reserve Balances
Projected Reserve Balances
500
(3) SFOS Respondents’ Motivation for Minimum Reserve
Levels
2)
1,000
1,000
In environments with a higher opportunity cost of
holding reserves, banks would likely reduce reserve
holdings to some degree
1) Intraday Payment Needs
$ billions
$ billions
1,600
1,200
5) Attractiveness of IOER
25%
6%
0%
24%
HQLA Monetization
Concerns
38%
31%
17%
48%
Source: 2018 Senior Financial Officer Survey
Note: Figures shown are the percent of respondents that rated the factor
important or very important.
0
6)
August Average System 2018 SFOS Estimated
Reserves
System LCLoR*
Source: 2018 Senior Financial Officer Survey, staff estimates; H.4.1 report
Note: Lowest Comfortable Level of Reserves. The reserve levels below
which respondents would take actions to maintain or increase balances.
(5) Markers of Reserve Need
Assessment
Fed funds
pressure
• About 10% of fed funds volumes above
IOER. Reduction in IOER arb activity
• Changes in aggregate reserve balances are
not correlated with changes in IOER-EFFR
spread
Payments
pressure
• No material change in timing of payments
• Demand for intraday credit is little changed.
Reserve
requirement
pressure
• Limited number of banks operating with
reserve balances close to requirements
• Discount window borrowing declined over
inter-meeting period
Other funding • Deposit betas remain low relative to banks'
pressure
projections for this hiking cycle
Increasing opportunity cost of holding reserves
Marker
(6) Estimated Minimum Reserve Level
in Alternate Interest Rate Scenarios (bps)
bps
Low
Mid
High
45
35
25
15
5
-5
-15
200
600
1,000
1,400
Aggregate reserve balances ($ billions)
Source: 2018 Senior Financial Officer Survey, staff estimates
Page 1 of 4
November 7–8, 2018
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
190 of 236
Exhibit 2: Comparison of operating regimes
Rate control
Operations
Money market
activity
Target rate
Liquidity
Total reserves
Interest
expense
Policy space
Limited excess reserves
- Setting reserve supply to intersect
demand at target rate
- Worked well pre-crisis
- Sources of reserve demand have
changed, creating uncertainty about
ability to precisely target a rate
- High complexity
- May help revive overnight interbank
market
- Natural to target EFFR
- Or could shift to OBFR (broader
measure of unsecured rates)
- Less aggregate liquidity available to
banking system
- Banks may rely more on Fed facilities
- Potential loss of monetary control
when providing extra liquidity away
from the ELB
- Highly uncertain medium-term point
estimate: $700B
- Depends on interest rate sensitivity of
demand for reserves, might fall in long
term
- Lower and less concentrated interest
payments on reserves
- Returning to an operating regime
similar to that used pre-crisis might
increase public trust in the Federal
Reserve’s ability to unwind
unconventional policy tools after a crisis
and increase willingness to use such
tools if another crisis occurred
Page 2 of 4
Abundant excess reserves
- Arbitrage from administered rates to all
market rates
- Many years of successful experience
controlling rates post-crisis
- Has worked well internationally
- Lower complexity
- Tends to suppress interbank trading,
but wholesale deposit markets remain
- Choice of target rate less
straightforward
- More aggregate liquidity available to
the banking system
- No loss of monetary control when
additional reserves supplied
- Highly uncertain point estimate: $1T
- Depends on interest rate sensitivity,
buffer for autonomous factors,
distributional frictions
- Higher and more concentrated interest
payments on reserves
- Could back reserves with short-term
assets in normal times, then exchange
for longer-term assets to provide
stimulus when needed
November 7–8, 2018
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Class I FOMC – Restricted Controlled (FR)
191 of 236
Exhibit 3: Target rate options
•
The policy target rate communicates and transmits the stance of monetary policy.
•
In a regime with limited excess reserves, policy implementation focuses on the reserves market.
Supply adjustments through OMOs influence the rate at which banks are able to borrow
reserves.
o Options: FFR and OBFR
•
In a regime with abundant excess reserves, transmission relies on arbitrage between money
market rates and the administered rates on Federal Reserve’s liabilities.
o Options: FFR, OBFR, Treasury repo rate, and General level of short-term rates (GLOSTR)
Rate Options
Federal Funds
Rate (FFR)
Limited excess reserves
- Communications continuity
- Similar framework to pre-crisis
- Some risks facing the federal funds
market going forward
Overnight
Bank Funding
Rate (OBFR)
- Comprehensive measure of banks’
funding costs
- More robust than EFFR though still
susceptible to volume declines
- Communications continuity with
current practice
Treasury Repo
Rate
(SOFR or TGCR)
General Level
of Short Term
Rates (GLOSTR)
Page 3 of 4
Abundant excess reserves
- Successful rate control so far, but
significant risks going forward
- Dependent on the behavior of FHLBs
- Potential communication challenges due
to idiosyncratic market dynamics
- Comprehensive measure of banks’
funding costs
- Supported by widespread investor
participation, but still subject to regulatory
disincentives
- Operational and communications
continuity with current practice
- Robust transaction volume under a range
of market conditions
- Affects financing costs of a wide range of
financial intermediaries
- Consistent with the migration of
overnight activity to the secured markets
- May require operations correlated in time
and size with Treasury issuance
- Robust to changes in market structure
that affect individual rates
- Eliminates the need to react to
idiosyncratic rate movements
- Transition may raise communication
challenges
November 7–8, 2018
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Class I FOMC – Restricted Controlled (FR)
192 of 236
Questions for Discussion
1. What do you see as the tradeoffs between remaining in a framework like the current
one, with abundant excess reserves, versus moving to a framework with limited
excess reserves? How does the level of reserves that would ultimately be necessary in
each framework affect your views on the appropriate choice of framework?
2. In your preferred framework for policy implementation, what interest rate(s) would
you prefer to target? What do you see as the important tradeoffs in choosing among
the range of possible target rates discussed in the staff background memos—the
effective federal funds rate (EFFR), the overnight bank funding rate (OBFR), a
Treasury repo rate, and the general level of short-term rates (GLOSTR)?
Page 4 of 4
November 7–8, 2018
Authorized for Public Release
Appendix 2: Materials used by Mr. Potter and Ms. Logan
193 of 236
November 7–8, 2018
Authorized for Public Release
Class II FOMC - Restricted (FR)
Material for Briefing on
Financial Developments and
Open Market Operations
Lorie Logan and Simon Potter
Exhibits by Ashley Rhodes
November 7, 2018
194 of 236
November 7–8, 2018
Authorized for Public Release
195 of 236
Class II FOMC – Restricted (FR)
Exhibit 1
(1) Ten-Year U.S. Treasury Yield
and Global Equity Indices Year-to-Date
Indexed to
12/29/17
120
(A)
S&P 500 (LHS)
MSCI World, ex. U.S. (LHS)*
MSCI EM Index (LHS)
10-Year Yield (RHS)
(2) Decomposition of Changes in U.S. Treasury Yields
Since September FOMC
BPS
Percent
(B)
3.50
(C)
3.00
110
2.50
100
2.00
90
1.50
80
1.00
70
12/29/17
0.50
03/29/18
06/29/18
09/29/18
*MSCI World, ex. U.S. captures developed markets ex. U.S.
(A) February 5th, VIX ETP-related market volatility (B) September FOMC
(C) October 3rd, large increase in Treasury yields
Source: Bloomberg, MSCI
5y
950
(A)
(B)
(C)
850
750
650
550
450
350
250
01/02/15
01/02/16
01/02/17
PPTS
Index
45
40
35
30
25
20
15
10
5
0
5800
01/02/18
(A) Renminbi Devaluation (B) February 5th, VIX ETP-related market volatility
(C) September FOMC
Source: Barclays, Bloomberg
3.5
Sep. SEP (Median)
Nov. Survey Modal Path (Median)
Sep. Survey Unconditional Path (Mean)
Nov. Survey Unconditional Path (Mean)
Sep. FOMC Market Path
Current Market Path
3.0
2.5
2.0
1.5
09/25/18
09/25/19
09/25/20
5y5y
30y
Renminbi
Shanghai Composite (LHS)
per Dollar*
U.S. Dollar-Chinese Renminbi (RHS)
5.40
5300
Renminbi
Depreciation
4800
4300
3800
3300
2800
2300
1800
01/02/12
01/02/14
01/02/16
5.60
5.80
6.00
6.20
6.40
6.60
6.80
7.00
7.20
01/02/18
*Scale inverted.
Source: Bloomberg
(5) Implied Path of the Policy Rate*
Percent
Nominal
(4) Chinese Exchange Rate and Shanghai Composite
Index
VIX (RHS)
BPS
10y
Real
Source: Bloomberg
(3) High-Yield Bond Spreads and VIX Index
High-Yield Bond Spreads (LHS)
Breakeven
35
30
25
20
15
10
5
0
-5
-10
-15
-20
(6) Average Cumulative Probability of U.S. First
Entering a Recession, by Year*
Percent
90
80
70
60
50
40
30
20
10
0
09/25/21
*Market-implied paths derived from federal funds and Eurodollar futures.
Unconditional survey path is the average PDF-implied means from the
Surveys of Primary Dealers and Market Participants.
Source: Bloomberg, Desk Calculations, Federal Reserve Board, FRBNY
*Based on all responses from the Survey of Primary Dealers. NBER-defined
recession.
Source: FRBNY
November 7–8, 2018
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Class II FOMC – Restricted (FR)
Exhibit 2
(7) Rates within the Target Range
EFFR
SOFR
ON RRP
BPS
+30
Top of
+25
Range
+20
TGCR
OBFR
1-Month Bill
IOER
+10
+5
+0
Bottom
-5
Intermeeting Periods
IOER-OBFR
Technical
Adjustment
10/01/17
02/01/18
Sep.
FOMC
06/01/18
10/01/18
Source: FRBNY
Source: Bloomberg, Board of Governors, FRBNY
(9) Money Market Investments of Federal Home
Loan Banks*
$ Billions
Interest-Bearing Deposit Accounts
Reverse Repo
Fed Funds
140
IOER-EFFR
BPS
10
9
8
7
6
5
4
3
2
1
0
06/01/17
+15
160
(8) Daily Spreads of Rates to Interest on Excess
Reserves, Excluding Month-Ends
(10) Fed Funds Borrowing by Motivation*
$ Billions
120
Fed Funds Borrowing for IOER Arbitrage
Fed Funds Borrowing for Non-IOER Arbitrage
100
120
100
80
80
60
60
40
40
20
0
06/01/17
20
10/01/17
02/01/18
06/01/18
*Daily average outstanding balances for the month. Difference in fed funds
volume between FR2420 data and FHFA data likely due to difference in
definition of fed funds used by FHFA and FR2420 reporting.
Source: Federal Housing Finance Agency
0
06/01/17
(11) Distribution of Fed Funds Volumes by Rate
< IOER-3
IOER-1
IOER +2
IOER-3
IOER
> IOER +2
IOER-2
IOER+1
Median Rate
$ Billions
06/01/18
10/01/18
Percent
Target Range
IOER
SOFR
TGCR
2.50
2.25
70
2.00
60
1.75
50
1.50
40
1.25
1.00
20
0.75
10
0
09/26/18
02/01/18
(12) Select Repo Rates, Excluding Month-Ends
80
30
10/01/17
*Borrowing classified based on Desk outreach to bank borrowers.
Source: FRBNY
10/11/18
Source: Board of Governors, FRBNY
10/25/18
0.50
06/01/17
10/01/17
02/01/18
Source: Board of Governors, FRBNY
06/01/18
10/01/18
November 7–8, 2018
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Class II FOMC – Restricted (FR)
Exhibit 3
(13) Survey Expectations for Spreads of Key Rates*
2018 FOMC
2019 FOMC Meetings
Meetings
Nov. Dec. Jan. Mar. Jun.** Dec.**
(14) Treasury Bills Outstanding
Projections
$ Billions
2,500
IOER - EFFR (bps)
Median
0
0
-1
-1
-3
-4
25th Percentile
0
-1
-2
-4
-5
-7
75th Percentile
1
0
0
1
0
0
1
0
0
0
-2
-3
5
10
10
10
10
15
IOER - OBFR,
Median (bps)
Top Target Range IOER, Median (bps)
*Based on all responses to the Surveys of Primary Dealers and Market
Participants.
**Last non-period end reporting date in month.
Source: FRBNY
2,250
2,000
1,750
1,500
06/01/17
1-Month LIBOR-OIS
BPS
70
06/01/18
10/01/18
(16) Importance of Factors Influencing IOER-EFFR
Spread Through 2019*
Median
Rating
5
60
02/01/18
Source: Desk Calculations, U.S. Treasury
(15) LIBOR-OIS Spreads
3-Month LIBOR-OIS
10/01/17
Treasury Supply
LCR Demand
FDIC Fees
Reserve Balances
IOER Arbitrage
4
50
3
40
30
2
20
1
10
0
0
Now to Mar. 28, 2019**
-10
06/01/17
10/01/17
02/01/18
06/01/18
10/01/18
Source: Bloomberg
$ Billions
2,500
(17) Monthly Reserve Balances
*Based on all responses to the Surveys of Primary Dealers and Market
Participants. Ratings for Other category not shown.
**Not period-end reporting dates.
Source: FRBNY
(18) Volumes Underlying OBFR and Selected Deposits
$ Billions
Projections
Eurodollars
Fed Funds
300
2,000
Selected Deposits
Start of
collection
250
1,500
200
1,000
500
Apr. 1 to Dec. 30, 2019**
June 2020
SFOS
Estimated
Reserve 150
Demand*
*Senior Financial Officer Survey estimated reserve demand point estimate is
$822 billion (red dashed line). Banks were asked to provide "the approximate
lowest dollar level of reserve balances that your bank would be comfortable
holding before it began taking active steps to maintain or increase its reserve
balance position."
Source: Desk Calculations, FRBNY
100
OBFR
0
Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21
50
0
06/01/17
Source: FRBNY
10/01/17
02/01/18
06/01/18
10/01/18
November 7–8, 2018
Class II FOMC – Restricted (FR)
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198 of 236
Appendix 1
(1) Summary of Operational Testing
Appendix 1
Summary of Operational Tests in prior period:
• Domestic Authorization
• October 11: Treasury bill rollover of $26 million
• October 18: Treasury bill sale of $47 million*
• October 24: Securities lending (using the back up lending tool) for $71 million
• October 16 to November 7: Outright MBS TBA purchase for a total of $241 million**
• Foreign Authorization
• October 11 and 12: U.S. dollar liquidity swap of $51,000 per counterparty (ECB, SNB***, BoC,
BoE)
• October 22 to 24: Japanese yen liquidity swap for JPY51,000
• November 6 and 7: Sterling liquidity swap for GBP 51,000
Upcoming Operational Tests:
• Seven tests scheduled under the Domestic Authorization
• November 8: Treasury bill maturity of $53 million
• November 14 : Outright MBS TBA purchases for up to $45 million****
• November 15: Overnight repo for no more than $75 million
• November 19: Overnight reverse repo with MBS collateral for no more than $175 million
• November 27 and 29: Outright MBS sales (specified pool) for up to $200 million, total
• November 28: Term reverse repo for no more than $175 million
• December 4: Term repo for no more than $75 million
• Two tests scheduled under the Foreign Authorization
• November 20: Yen-denominated repo with 552 U.S.C. (b)(4) for JPY100 million
• December 11: Yen-denominated sovereign debt sales to private counterparty for JPY100 million
* In the September Briefing, the Desk stated that it would sell exactly $50 million of Treasury bills. However, this figure represented
an estimate of the maximum amount to be sold. During the operation the Desk sold a slightly smaller amount, $47 million.
** The total figure assumes the Desk purchases the maximum of $27 million for the outright operation scheduled on November 7th.
*** The SNB conducted an end-to-end test of its dollar repo facility with two of its regular private bank counterparties as part of the
U.S. dollar liquidity swap test.
**** For monthly Agency MBS reinvestment periods where principal receipts are below the cap, the Desk will conduct up to $300
million of small value outright purchases. Monthly reinvestment periods run from the 10th business day of the current month to the
9th business day of the following month.
November 7–8, 2018
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Class II FOMC – Restricted (FR)
Appendix 2 (Last)
Appendix 2
(1) MBS Purchases Summary Since Cap Implementation Through 11/05/18 ($ M)
Purchase Period
Actual
Paydowns
Cap
Actual
Purchases
Net Deviation
Cumulative
Deviation
Oct-17
10/16/17
-
11/13/17
24,353
4,000
20,355
2
2
Nov-17 *
11/14/17
-
12/13/17
28,316
4,000
24,327
11
13
Dec-17
12/14/17
-
01/12/18
24,032
4,000
20,038
6
19
Jan-18
01/16/18
-
02/13/18
22,909
8,000
14,921
12
31
Feb-18
02/14/18
-
03/13/18
20,689
8,000
12,684
(5)
26
Mar-18
03/14/18
-
04/12/18
19,294
8,000
11,308
14
40
Apr-18
04/13/18
-
05/11/18
21,233
12,000
9,234
1
41
May-18
05/14/18
-
06/13/18
20,793
12,000
8,807
14
55
Jun-18
06/14/18
-
07/13/18
24,526
12,000
12,534
8
63
Jul-18
07/16/18
-
08/13/18
22,729
16,000
6,725
(4)
59
Aug-18
08/14/18
-
09/14/18
21,602
16,000
5,607
5
64
Sep-18
09/17/18
-
10/12/18
21,759
16,000
5,755
(4)
60
Oct-18 **
10/15/18
-
11/14/18
17,878
20,000
220
0
60
*Actual paydowns include agency debt maturity. Nov-17: $2,366 million; Jun-18: $1,982 million.
**Actual purchases ongoing, reflect data through 11/07/18. T arget amount for October purchase period is $292 million. T his is a small value
purchase not a reinvestment purchase.
(2) FX Swaps Outstanding
$ Billions
BOJ
14
ECB
12
10
8
6
4
2
0
12/14/2016
4/14/2017
8/14/2017
12/14/2017
4/14/2018
8/14/2018
Source: FRBNY
(3) FX Intervention
• There were no intervention operations in foreign currencies for the System's account during the intermeeting period
November 7–8, 2018
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Appendix 3: Materials used by Mr. Engen
200 of 236
November 7–8, 2018
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Class II FOMC - Restricted (FR)
Material for Briefing on
The U.S. Outlook
Eric M. Engen
Exhibits by Bo Yeon Jang and Rosemary Rhodes
November 7, 2018
201 of 236
November 7–8, 2018
Authorized for Public Release
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Class II FOMC - Restricted (FR)
Forecast Summary
Confidence Intervals for Panels 1, 5, 9, and 10 Based on FRB/US Stochastic Simulations
1. Real GDP
2. Estimates of Private Nonfarm Payroll Gains
Percent change, annual rate
10
10
October TB
September TB
70% confidence interval
Tealbook Update (11/2/18)
8
6
8
Thousands of employees
500
BLS
FRB/ADP
Pooled estimate
400
400
6
Oct.
300
4
4
2
2
0
0
-2
2016
2017
2018
2019
500
2020
2021
-2
300
200
200
100
100
0
2016
2017
0
2018
Note: Shaded region denotes 90% confidence interval for pooled
estimate. October FRB/ADP value includes data through 10/27.
3. Unemployment Rates by Race or Ethnicity
Percent
20
Black or African-American
Hispanic or Latino
Aggregate
White
Asian
16
12
20
12
8
4
4
Oct.
2000
2004
2008
Judgmental
State-space model
2012
2016
0
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
2013
2014
2015
2016
2017
2018
Note: Judgmental estimate is from October TB. Shaded region
denotes 70 percent confidence interval around October TB model
estimate.
5. Unemployment Rate
6. Measures of Labor Compensation
Percent
October TB
September TB
70% confidence interval
6
7
4
5
4
4
3
3
2017
2018
2019
Atlanta Fed wage growth tracker*
Compensation per hour
Average hourly earnings**
Employment cost index
5
5
2016
Percent change from year earlier
6
6
Natural rate
2020
2021
2
4
3
Note: Three-month moving averages. Shaded bars indicate a period
of business recession as defined by the NBER.
7
2
Percent
4
3
16
8
0
4. Output Gap Estimates
-4
6
5
Q3
Sep.
3
4
3
Oct.
Sep.
2
2
1
1
0
0
-1
2013
2014
2015
2016
2017
*Three-month moving average. **All employees.
Page 1 of 3
2018
-1
November 7–8, 2018
Authorized for Public Release
7. Measures of Underlying PCE Price Inflation
Percent change from year earlier
2.5
Excluding food and energy
Dallas Fed trimmed mean
Common component from factor model
2.5
2.0
Sep.
1.5
1.0
1.5
2013
2014
2015
2016
2017
8. Monthly PCE Price Inflation
Percent change from year earlier
3.0
Total
Core
2.5
2.0
2018
1.0
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Class II FOMC - Restricted (FR)
3.0
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
2014
2015
2016
2017
2018
0.0
Note: Shaded yellow region indicates forecast period.
9. PCE Prices Excluding Food and Energy
Percent change, annual rate
10. Total PCE Prices
Percent change, annual rate
5
5
4
4
3
3
3
3
2
2
2
2
1
1
1
1
0
0
5
October TB
September TB
70% confidence interval
Advance BEA estimate
4
0
2016
2017
2018
2019
2020
2021
11. Federal Funds Rate Projections
Percent
6
October TB
September TB
70% confidence interval
Advance BEA estimate
2016
2017
2018
2019
4
2020
2021
12. Possible Explanations for the
Different Funds Rate Paths
6
1
Different assumed policy rules.
5
5
4
4
3
3
2
1
0
Tealbook baseline assumes greater
underlying strength ("momentum") in
aggregate demand.
Real activity is more interest sensitive
than what the Tealbook baseline
assumes.
2
SEP (median)
September Tealbook
Staff rule with SEP data
2018
2019
2020
2021
1
0
0
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5
0
November 7–8, 2018
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Class II FOMC - Restricted (FR)
13. Simulated Outcomes Under Different Policy Path or Interest Sensitivity Assumptions
A. Federal Funds Rate
6
B. Unemployment Rate
Percent
Tealbook baseline and extension
Using SEP funds rate path
Greater interest sensitivity
5
6
Tealbook baseline and extension
Using SEP funds rate path
Greater interest sensitivity
7
5
4
6
6
5
5
4
4
3
3
4
3
3
2
2
1
1
0
3.0
Percent
7
0
2
2
2016 2017 2018 2019 2020 2021 2022 2023 2024
2016 2017 2018 2019 2020 2021 2022 2023 2024
C. PCE Prices Excluding Food and Energy
D. Real GDP
4-quarter percent change
Tealbook baseline and extension
Using SEP funds rate path
Greater interest sensitivity
2.5
3.0
4-quarter percent change
4.0
Tealbook baseline and extension
Using SEP funds rate path
Greater interest sensitivity
3.5
4.0
3.5
2.5
2.0
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
2016 2017 2018 2019 2020 2021 2022 2023 2024
0.0
0.0
2016 2017 2018 2019 2020 2021 2022 2023 2024
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November 7–8, 2018
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Appendix 4: Materials used by Ms. Wilson
205 of 236
November 7–8, 2018
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Class II FOMC – Restricted (FR)
Material for Briefing on
The International Outlook
Beth Anne Wilson
Exhibits by Mandy Bowers
November 7, 2018
206 of 236
November 7–8, 2018
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United States: These Might Rock You
• Interest rates are projected to rise materially.
• The dollar strengthens commensurately.
• U.S. trade policy remains highly uncertain.
11/7/2018
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Europe: Lost that lovin’ feeling?
• Euro-area data have persistently disappointed.
• Leading to downward revisions in the outlook.
11/7/2018
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Brexit: Breakin’ Up is Hard to Do
• The U.K. and EU still seem far apart, and avoiding a “no deal” Brexit is far
from a foregone conclusion.
• Hard and sudden “no deal” Brexit could ….
• Weigh on UK growth
• Increase financial stability risks, with potential transmission to the U.S.
Key Future Dates
UK Real GDP
2
Dec 13-14, 2018
Jan 21, 2019:
EU Summit:
U.K.’s self-imposed
EU fallback target to deadline to bring deal
reach agreement
to Parliament
Nov 2018:
Emergency
Summit?
EU Ratifications of
withdrawal agreement
1
March 29, 2019:
U.K. officially
leaves EU
0
Dec 31, 2020:
Transition ends
October TB
-1
No Deal Brexit
-2
-3
2019Q1 2019Q2 2019H2
2020
2021
Source: Staff estimates.
11/7/2018
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Italy: Mambo Italiano
• Incoming government is not adhering to EU fiscal rules.
• Potentially leading to sanctions.
• Suffers from low growth, high debt, and unprofitable banks.
• Struggles could reverberate across global markets.
Gross Public Debt
Percent of GDP
100bp shock + GDP Growth 1% lower
100bp shock
Baseline
Source: Staff simulation. 100bp shock shows impact when marginal rate receives 100bp
shock that remains level over forecast horizon. GDP growth 1 percentage point slower
than baseline simulation.
11/7/2018
Source: Markit, Bloomberg, staff calculations.
*Credit Default Swap indexes weighted by bank total assets.
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China: Slow Ride
• Deleveraging has led to a deceleration of growth.
• Trade tensions with the U.S. limited to date.
• Potential effect could be much more.
Chinese Retail Sales and New Export Orders
Chinese Exports:
$2.3 Trillion
Chinese Imports:
$1.8 Trillion
(18% of GDP)
(15% of GDP)
US: $430bn
(4% of US GDP)
50% subject to
tariffs
US: $150bn
(1% of GDP)
75% subject
to tariffs
Source: Staff estimates.
11/7/2018
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China: Don’t Bring me Down
• Already, we expect China’s growth to slow noticeably.
• Even weaker growth would be expected to slow broader EME
performance as well.
Effect of China Growth on Rest of EME Growth*
Coefficient
1
0.8
0.6
0.4
0.2
0
-0.2
95 percent confidence interval
-0.4
-0.6
-0.8
Source: Staff estimates.
11/7/2018
1990
1994
1998
2002
2006
2010
2014
2018
*Coefficient on Chinese growth from 10-year rolling regressions of aggregate
EME ex-China growth on Chinese growth and advanced-economy growth.
Source: staff estimates.
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EME: Won’t Get Fooled Again
• Common view is that U.S. monetary policy tightening hurts EMEs.
• But not every tightening cycle slows EME growth or leads to capital
outflows.
Average Real GDP Growth around U.S.
Tightenings
Start of U.S.
Tightening
Episode
Latin America
2 Years
Before
2 Years
After
2 Years
Before
2 Years
After
1980Q3
5.8
6.4
6.9
3.0
1988Q2
11.9
7.1
2.1
2.9
1994Q1
8.1
9.1
3.3
1.0
1999Q2
2.5
7.3
4.0
3.0
2004Q2
7.4
7.6
2.7
4.1
2015Q4
5.7
5.7
2.6
1.6
Difference in cumulative flows as a % of GDP
Emerging Asia
Change in capital inflows to EMEs
2 years before and after initial Fed tightening
LVA
UKR
Source: Staff estimates.
Tightening Quarter
Black lines are median value, box edges are 25th and 75th percentile. Lines are
range of values excluding outliers (greater than 1.5*interquartile range). Difference
is cumulative gross inflows two years after tightening minus those 2 years after.
Scaled to GDP in quarter of tightening. Source: Haver, IMF BoPS, WDI.
11/7/2018
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EME: Take the money and run?
• What is the impact on EMEs if our Tealbook baseline is realized?
Model Description
• 4 regions – U.S., AFE, Emerging Asia (less vulnerable), Latin America (more
vulnerable)
• Allow currency depreciation to:
• Boost inflation expectations.
• Raise borrowing costs of vulnerable EMEs.
Calibrate
• Use Blue Chip consensus as starting point to capture market expectations.
• Then add shocks to U.S. aggregate demand to generate TB unemployment
higher U.S. policy rates than markets.
forecast
Examine impact on foreign economies
11/7/2018
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EME: Good times, Bad times
• Higher path of U.S. interest rates pushes down currencies abroad.
• Foreign long-term rates also rise, especially in Latin America.
• For AFEs and less vulnerable EMEs the boost to trade from the exchange
rate outweighs the cost of higher interest rate.
• For vulnerable EMEs, the reverse is true but the drag on GDP is slight.
Source: Staff estimates.
11/7/2018
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Vulnerabilities: All Along the Watchtower
• EME vulnerability index is rising.
• Matrix points to some notable
vulnerabilities and prominent
risks.
EME Vulnerability Index*
Country
IFSM Assessment
October
Prominence of
Risks
Canada
France
Germany
Italy
Japan
Switzerland
United Kingdom
Moderate
Moderate
Low
Notable
Moderate
Moderate
Moderate
Low
Medium
Medium
High
Medium
Low
High
Brazil
China
Hong Kong
Mexico
South Korea
Turkey
Notable
Notable
Moderate
Notable
Low
Elevated
High
High
Medium
Medium
Medium
High
Overall
Moderate
IFSM Assessment Key:
Source: Staff calculations. Based on 6 indicators: CA/GDP, gross govt debt/GDP, avg inflation,
Extremely Subdued
increase in bank credit to private sector/GDP, reserves/GDP, total external debt/exports. Score
Prominence
of Risks Key:
ranges from 1 (all variables for all countries falling in bottom 5th percentile of historical experience)
th
Low
to 5 (all variables for all countries falling in top 5 percentile). Countries: Brazil, Chile, China,
Colombia, India, Indonesia, Korea, Malaysia, Mexico, Philippines, South Africa, Thailand, Turkey.
11/7/2018
CLASS II FOMC-RESTRICTED (FR)
Low
Moderate
Medium
Notable
Elevated
High
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Bottom Line: Peaceful (Qu)Easy Feeling
• Baseline of relatively stable foreign growth near potential.
• Does incorporate drag from Britaly and EMEs.
• Leaving it little changed from last year despite sizable U.S. revision.
*Weighted by bilateral shares in U.S. merchandise exports.
Source: Staff estimates.
11/7/2018
Source: Staff estimates.
CLASS II FOMC-RESTRICTED (FR)
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Appendix 5: Materials used by Mr. Bassett
218 of 236
November 7–8, 2018
Authorized for Public Release
Class II FOMC - Restricted (FR)
Material for Briefing on
Financial Stability Developments
William F. Bassett
Exhibits by Candy Martinez
November 7, 2018
219 of 236
November 7–8, 2018
Authorized for Public Release
220 of 236
Exhibit 1: Valuations and Business Leverage
Class II FOMC - Restricted (FR)
1−1
Equity Risk Premium
November 7, 2018
1−2
Corporate Bond Spreads
Percent
Monthly
Basis points
16
14
12
1600
Monthly average
10−year high−yield
10−year BBB
1200
10
8
6
800
4
Nov.
06
2
0
Nov.
05
−2
400
−4
0
−6
2000
2003
2006
2009
2012
2015
2000
2018
1−3
Growth of Nominal Prices of Existing Homes
2006
2009
2012
2015
2018
1−4
Business Sector Credit−to−GDP Ratio
Percent change, annualized
Monthly
2003
Ratio
20
0.8
Quarterly
S&P Case−Shiller
CoreLogic
Zillow
15
Q2
0.7
10
5
0.6
0
0.5
−5
−10
2012
2014
2016
1982
1988
1994
2000
2006
2012
2018
1−6
Holders of Leveraged Loans
1−5
Total Net Issuance of Nonfinancial Risky Debt
Billions of dollars
Quarterly
0.4
2018
Total
Institutional leveraged loans
High−yield and unrated bonds
90
60
30
Institution Type
2015
2018Q1
1. CLOs
53%
59%
2. Banks
12%
9%
3. Mutual Funds
18%
21%
5%
6%
12%
6%
4. Insurance Companies
0
5. Other
−30
2006
2008
2010
2012
2014
2016
2018
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Exhibit 2: Financial Leverage and Funding Markets
Class II FOMC - Restricted (FR)
2−2
Changes in the Use of Financial Leverage
by Hedge Funds
2−1
Common−Equity−to−Assets Ratio for Commercial Banks
Quarterly, s.a.
Large BHCs
Other BHCs
Q2
Net percent of primary dealers
12
11
10
9
20
8
Q3
0
5
4
Decrease
7
6
40
Quarterly
Increase
Percent of total assets
November 7, 2018
−20
3
−40
2
1988
1993
1998
2003
2008
2013
2012 2013
2018
2−3
Cumulative Changes in Rates on Deposits
2014
2015
2016
2017
2018
2−4
Liability Categories at Large Banks
Percent
Weekly
GSIBs
Large Non−GSIBs
Other
Percent of assets
0.58
0.48
Nov.
06
80
Short−Term Funding
Core Deposits
Q2
60
0.38
40
0.28
0.18
20
0.08
−0.02
2016
2015
2017
2018
2−5
Money in Potential MMF Substitutes
2003
2006
2009
2012
2015
2018
2−6
Libor Transition
Billions of dollars
Monthly
0
2000
Stable value funds
Offshore MMFs
Short−term investment funds
Ultrashort bond funds
Local government investment pools
1400
1050
LIBOR panel banks have only agreed to
continue submissions through the end of
2021
700
350
0
2008
2010
2012
2014
2016
2018
Page 2 of 4
The Federal Reserve System is leading the
effort to promote SOFR, and exploring
solutions for legacy LIBOR contracts
November 7–8, 2018
Class II FOMC - Restricted (FR)
Low
Moderate
October 2017
•
•
Valuation
Pressures
•
•
•
Private
Nonfinancial
Sector
Leverage
Financial
Sector
Leverage
•
•
•
•
•
Maturity and
Liquidity
Transformation
•
•
222 of 236
Exhibit 3: Staff Judgement on Levels of Vulnerabilities
Extremely subdued
Key:
Authorized for Public Release
Notable
Elevated
July 2018
The equity price-to-earnings ratio is
near its highest value outside the dotcom era and has edged up further.
Corporate bond spreads to Treasury
yields have compressed a little further,
while standards and terms on leveraged
loans have deteriorated over the last
year.
CRE prices have continued to rise,
although bank lending standards for
CRE loans have tightened somewhat.
Asset valuations appear less excessive,
but still stretched, when compared to
current low Treasury yields.
•
Leverage in the nonfinancial corporate
sector remains elevated, but risky debt
outstanding has edged down.
Household borrowing has moved up
mainly for prime borrowers.
Overall nonfinancial sector leverage
continues to be below trend by most
estimates.
•
Capital positions at banks and insurance
companies remain at high levels.
Available indicators of leverage at other
nonbank financial institutions are
mostly little changed, though there are
some signs of leverage increasing.
•
Large BHCs’ holdings of liquid assets
remain at high levels.
There has been little growth outside of
government funds in potential
substitutes for prime money market
funds.
Insurance companies continue to grow
their nontraditional liabilities, albeit at a
slower pace in most categories.
•
•
•
•
•
•
•
October 2018
Valuation pressures remain elevated
across most markets.
House prices have accelerated over the
past year, pushing their ratio to rents
further above their estimated historical
trend.
Valuation pressures in CRE markets
continued to increase from already
stretched conditions.
•
In the nonfinancial corporate sector,
debt owed by highly-levered and
lower-rated firms remains elevated.
The household sector appears resilient.
The amount of debt owed by borrowers
with near-prime and subprime credit
scores is flat and well below pre-crisis
levels.
•
Capital positions at banks and
insurance companies remain at high
levels.
Some measures of hedge fund leverage
remain high.
•
Large BHCs’ holdings of liquid assets
remain at high levels.
Banks’ core deposit funding remains
high, while short-term funding remains
near historical lows.
The growth in potential substitutes for
prime MMFs remains limited.
•
Overall
Assessment
Page 3 of 4
November 7, 2018
•
•
•
•
•
•
•
Valuation pressures remain elevated
across most markets.
Leveraged lending markets show
continued evidence of elevated risk
appetite.
CRE capitalization rates are at
historical lows.
The ratio of house prices to rents
remains above its historical trend
although house prices have decelerated
recently.
Corporate debt remains elevated, amid
signs of deteriorating credit
underwriting standards.
The household sector appears resilient,
with moderate borrowing concentrated
among prime-rated borrowers.
Capital positions at banks and
insurance companies remain at high
levels.
Available indicators of hedge fund
leverage remain high.
Large BHCs’ holdings of liquid assets
remain at high levels.
Banks’ core deposit funding remains
high, while short-term funding remains
near historical lows.
Aggregate measures of runnable
liabilities, including those issued by
nonbanks, remain relatively low.
November 7–8, 2018
Class II FOMC - Restricted (FR)
Authorized for Public Release
Notes to Exhibits
223 of 236
November 7, 2018
Exhibit 1:
1: Note: Equity risk premium is estimated using a dividend discount model developed by staff.
Source: Staff estimates.
2: Note: Spreads over 10−year Treasury yield. Plot includes data up to Nov 5.
Source: Staff estimates of smoothed corporate yield curves based on Merrill Lynch data and smoothed
Treasury yield curve.
3: Note: The date of the last observation varies by series. S&P Case-Shiller ends in August, CoreLogic
ends in September, and Zillow ends in September.
Source: Standard and Poor's, CoreLogic, and Zillow.
4: Source: Financial Accounts of the United States and NIPA.
5: Note: Data are a four-quarter moving average. Total net issuance of risky debt is the sum of the net
issuance of speculative-grade and unrated bonds and leveraged loans.
Source: Mergent Fixed Investment Securities Database, S&P.
6: Source: S&P LCD.
Exhibit 2:
1: Note: Common equity is defined as total equity capital net of preferred equity and intangible assets, and
is divided by total assets. Large BHCs are those with greater than $50 billion in total assets. The shaded
bars indicate periods of business recession as defined by the National Bureau of Economic Research.
Source: Call Report.
2: Note: Data are collected in the middle of each quarter.
Source: Senior Credit Officer Opinion Survey (SCOOS).
3: Note: Jumbo CD - $100k: up to 1 year maturity. Rate hikes occurred on 12/13/2017, 03/21/2018,
6/13/2018 and 09/26/2018. Large Non-GSIB banks include BHCs and IHCs that have $50 billion or
more in average total consolidated assets, and are not designated as US Global Systemically
Important Banks. The IHCs of Credit Suisse, Barclays, and UBS are excluded due to lack of data
history for comparison.
Source: SNL.
4: Note: Data as of 2018:Q2. Large banks include BHCs and IHCs that have $50 billion or more in
average total consolidated assets. The IHCs of Credit Suisse, Barclays, and UBS are excluded due to
lack of data history for comparison.
Source: FR Y-9C.
5. Note: MMFs are money market funds. Local government investment pools are rated "AAAm" or "AAm."
The date of the last observation varies by series. Stable value funds ends in June, offshore MMFs ends
in September, short-term investment funds ends in June, ultrashort bonds funds ends in August, and
local government investing pools ends in September.
Source: S&P.
Exhibit 3:
Note: Heat map color assignments were made by staff judgment. In the absence of significant structural
changes, we would expect vulnerabilities to spend roughly equal proportions of time in each of the
colored risk buckets.
Source: October 2018 QS report.
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Appendix 6: Materials used by Mr. Reeve
224 of 236
November 7–8, 2018
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Material for the Briefing on
Monetary Policy Alternatives
Trevor Reeve
Exhibits by Gurubala Kotta
November 7-8, 2018
225 of 236
November 7–8, 2018
Authorized for Public Release
226 of 236
Class I FOMC – Restricted Controlled (FR)
Monetary Policy Considerations
Alternative B
Federal funds rate step path
Percent
Recent: November 6, 2018
Last FOMC: September 25, 2018
Economy evolving broadly in line with
expectations.
2.8
2.6
Maintain the target range at this
meeting.
2.4
2.2
Reiterate "further gradual increases."
2.0
Aug. 18
Nov. 18
Jan. 19
May 19
Jul. 19
Oct. 19
Jan. 20
Note: Derived from settlement quotes on federal funds futures contracts
from the CME.
Alternative C
Subjective probabilities of year−ahead
core PCE inflation
Percent
2016: Q3
2017: Q3
2018: Q3
Increasingly high levels of resource
utilization, buildup of inflation risks.
40
30
Raise the target range.
20
10
"Further gradual increases are likely to
continue for some time."
0
0.0−0.4
1.0−1.4
2.0−2.4
3.0−3.4
>=4.0
<0
0.5−0.9
1.5−1.9
2.5−2.9
3.5−3.9
Source: Survey of Professional Forecasters.
Alternative A
Real federal funds rate: Projections and
r* estimates
Percent
2.5
2.0
Monetary policy is appropriately
neutral.
1.5
1.0
0.5
Maintain the target range.
0.0
Historical real federal
funds rate
Mean of r* estimates
Remove reference to "further gradual
increases."
Range of r* estimates
Median of SEP
projections
2015
2017
2019
−0.5
−1.0
−1.5
−2.0
2021
Note: 2018:Q3 is based on seven of eight models. See the September
2018 Monetary Policy Strategies section of Tealbook A for details.
Whiskers denote central tendency of SEP projections.
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Class I FOMC – Restricted Controlled (FR)
Monetary Policy Considerations
Expected pace of tightening and statement language: 2004−2007
Percent
6
Percentage points
May
2004
Expected tightening over
next 6 months (right)
Dec. Jan.
2005 2006
May Jun.
2006 2006
Mar.
2007
1.2
Aug.
2007
1
Federal funds rate
target (left)
5
0.8
0.6
4
0.4
0.2
Expected tightening between
6 and 12 months ahead (right)
3
0
−0.2
2
−0.4
−0.6
1
"policy accommodation can be removed"
"may be
needed"
"at a pace that is likely to be measured"
0
2004
2005
"firming"
"extent and timing"
will be data dependent
"adjustments"
will be data
dependent
2006
−0.8
−1
2007
Note: Monthly averages were used for the expected tightening series. The hatched region between the Dec. 2005 and Jan. 2006 FOMC meeting dates
indicates the period in which the postmeeting statement included the word "measured", but in different usage than in the earlier period. The hatched region
between the May 2006 and Jun. 2006 FOMC meeting dates indicates the period in which the post−meeting statement said that additional policy firming
"may yet be needed", but that its "extent and timing" would be data dependent.
Source: Federal Reserve Board, Board staff calculations.
Expected pace of tightening and statement language: 2015 − present
Percent
Percentage points
3
Dec.
2015
Mar.
2017
Jan.
2018
0.5
Expected tightening between
6 and 12 months ahead (right)
2
+
Expected tightening over
next 6 months (right)
+
0.3
0.1
1
−0.1
Federal funds rate
target (left)
0
−0.3
"only gradual increases in
the federal funds rate"
"gradual increases in
the federal funds rate"
"further gradual increases
in the federal funds rate"
−0.5
−1
2015
2016
2017
2018
Note: Monthly averages were used for the expected tightening series. Expected tightening data as of November 6 is denoted with "+".
Source: Federal Reserve Board, Board staff calculations.
Possible language for future transition
Alternative A drops reference to future rate increases.
Other possibilities
"The Committee expects that some further gradual increases in the target range..."
"The Committee judges that some further gradual increases...may be warranted to..."
"In determining the timing and size of any additional increases in the federal funds rate, the
Committee will assess..."
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Class I FOMC – Restricted Controlled (FR)
SEPTEMBER 2018 FOMC STATEMENT
1. Information received since the Federal Open Market Committee met in August
indicates that the labor market has continued to strengthen and that economic
activity has been rising at a strong rate. Job gains have been strong, on average,
in recent months, and the unemployment rate has stayed low. Household
spending and business fixed investment have grown strongly. On a 12-month
basis, both overall inflation and inflation for items other than food and energy
remain near 2 percent. Indicators of longer-term inflation expectations are little
changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that further gradual
increases in the target range for the federal funds rate will be consistent with
sustained expansion of economic activity, strong labor market conditions, and
inflation near the Committee’s symmetric 2 percent objective over the medium
term. Risks to the economic outlook appear roughly balanced.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4
percent.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to its maximum employment objective and its symmetric 2
percent inflation objective. This assessment will take into account a wide range
of information, including measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial and
international developments.
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Class I FOMC – Restricted Controlled (FR)
ALTERNATIVE A FOR NOVEMBER 2018
1. Information received since the Federal Open Market Committee met in August
September indicates that the labor market has continued to strengthen and that
economic activity has been rising at a strong rate. Job gains have been strong, on
average, in recent months, and the unemployment rate has stayed low declined.
Household spending and has continued to grow strongly, while growth of
business fixed investment have grown strongly has moderated from its rapid
pace earlier in the year. On a 12-month basis, both overall inflation and
inflation for items other than food and energy remain near 2 percent. Indicators
of longer-term inflation expectations are little changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that further gradual
increases in the current target range for the federal funds rate will, for a time, be
consistent with sustained expansion of economic activity, strong labor market
conditions, and inflation near the Committee’s symmetric 2 percent objective over
the medium term. Risks to the economic outlook appear roughly balanced.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to raise maintain the target range for the federal funds rate to
at 2 to 2-1/4 percent.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to its maximum employment objective and its symmetric
2 percent inflation objective. This assessment will take into account a wide range
of information, including measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial and
international developments.
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November 7–8, 2018
Authorized for Public Release
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ALTERNATIVE B FOR NOVEMBER 2018
1. Information received since the Federal Open Market Committee met in August
September indicates that the labor market has continued to strengthen and that
economic activity has been rising at a strong rate. Job gains have been strong, on
average, in recent months, and the unemployment rate has stayed low declined.
Household spending and has continued to grow strongly, while growth of
business fixed investment have grown strongly has moderated from its rapid
pace earlier in the year. On a 12-month basis, both overall inflation and
inflation for items other than food and energy remain near 2 percent. Indicators
of longer-term inflation expectations are little changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that further gradual
increases in the target range for the federal funds rate will be consistent with
sustained expansion of economic activity, strong labor market conditions, and
inflation near the Committee’s symmetric 2 percent objective over the medium
term. Risks to the economic outlook appear roughly balanced.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to raise maintain the target range for the federal funds rate to
at 2 to 2-1/4 percent.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to its maximum employment objective and its symmetric
2 percent inflation objective. This assessment will take into account a wide range
of information, including measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial and
international developments.
Page 5 of 11
November 7–8, 2018
Authorized for Public Release
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ALTERNATIVE C FOR NOVEMBER 2018
1. Information received since the Federal Open Market Committee met in August
September indicates that the labor market has continued to strengthen tighten
and that economic activity has been rising at a strong rate. Job gains have been
strong, on average, robust in recent months, and the unemployment rate has
stayed low reached multi-decade lows. Household spending and has continued
to grow strongly, while growth of business fixed investment have grown
strongly has moderated from its rapid pace earlier in the year. On a 12-month
basis, both overall inflation and inflation for items other than food and energy
remain near 2 percent. Indicators of longer-term inflation expectations are little
changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that further gradual
increases in the target range for the federal funds rate will be consistent with
sustained expansion of economic activity, strong labor market conditions, and
warranted for some time to keep inflation near the Committee’s symmetric
2 percent objective and to sustain the economic expansion and maximum
employment over the medium term. Risks to the economic outlook for
economic activity appear roughly balanced. The Committee is monitoring
inflation developments closely.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to raise the target range for the federal funds rate to 2 to
2-1/4 to 2-1/2 percent. This decision should help guard against the risk that
excessive inflation pressures will emerge amid increasingly high levels of
resource utilization.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to its maximum employment objective and its symmetric
2 percent inflation objective. This assessment will take into account a wide range
of information, including measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial and
international developments.
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November 7–8, 2018
Authorized for Public Release
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Implementation Note for November 2018 Alternatives A and B
Release Date: November 8, 2018
Decisions Regarding Monetary Policy Implementation
The Federal Reserve has made the following decisions to implement the monetary policy
stance announced by the Federal Open Market Committee in its statement on September
26 November 8, 2018:
The Board of Governors of the Federal Reserve System voted [ unanimously ]
to raise maintain the interest rate paid on required and excess reserve
balances to at 2.20 percent, effective September 27 November 9, 2018.
As part of its policy decision, the Federal Open Market Committee voted to
authorize and direct the Open Market Desk at the Federal Reserve Bank of
New York, until instructed otherwise, to execute transactions in the System
Open Market Account in accordance with the following domestic policy
directive:
“Effective September 27 November 9, 2018, the Federal Open Market
Committee directs the Desk to undertake open market operations as
necessary to maintain the federal funds rate in a target range of 2 to
2-1/4 percent, including overnight reverse repurchase operations (and
reverse repurchase operations with maturities of more than one day when
necessary to accommodate weekend, holiday, or similar trading
conventions) at an offering rate of 2.00 percent, in amounts limited only
by the value of Treasury securities held outright in the System Open
Market Account that are available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the
amount of principal payments from the Federal Reserve's holdings of
Treasury securities maturing during September that exceeds $24 billion,
and to continue reinvesting in agency mortgage-backed securities the
amount of principal payments from the Federal Reserve's holdings of
agency debt and agency mortgage-backed securities received during
September that exceeds $16 billion. Effective in October, the Committee
directs the Desk to roll over at auction the amount of principal payments
from the Federal Reserve's holdings of Treasury securities maturing
during each calendar month that exceeds $30 billion, and to continue
reinvesting in agency mortgage-backed securities the amount of principal
payments from the Federal Reserve's holdings of agency debt and agency
mortgage-backed securities received during each calendar month that
exceeds $20 billion. Small deviations from these amounts for operational
reasons are acceptable.
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November 7–8, 2018
Authorized for Public Release
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The Committee also directs the Desk to engage in dollar roll and coupon
swap transactions as necessary to facilitate settlement of the Federal
Reserve's agency mortgage-backed securities transactions.”
In a related action, the Board of Governors of the Federal Reserve System
voted [ unanimously ] to approve a 1/4 percentage point increase in the
establishment of the primary credit rate to at the existing level of
2.75 percent., effective September 27, 2018. In taking this action, the Board
approved requests to establish that rate submitted by the Boards of Directors
of the Federal Reserve Banks of …
This information will be updated as appropriate to reflect decisions of the Federal Open
Market Committee or the Board of Governors regarding details of the Federal Reserve's
operational tools and approach used to implement monetary policy.
More information regarding open market operations and reinvestments may be found on
the Federal Reserve Bank of New York's website.
Page 8 of 11
November 7–8, 2018
Authorized for Public Release
234 of 236
Class I FOMC – Restricted Controlled (FR)
Implementation Note for November 2018 Alternative C
Release Date: November 8, 2018
Decisions Regarding Monetary Policy Implementation
The Federal Reserve has made the following decisions to implement the monetary policy
stance announced by the Federal Open Market Committee in its statement on September
26 November 8, 2018:
The Board of Governors of the Federal Reserve System voted [ unanimously ]
to raise the interest rate paid on required and excess reserve balances to 2.20
2.40 percent, effective September 27 November 9, 2018. Setting the interest
rate paid on required and excess reserve balances 10 basis points below
the top of the target range for the federal funds rate is intended to foster
trading in the federal funds market at rates well within the FOMC’s
target range.
As part of its policy decision, the Federal Open Market Committee voted to
authorize and direct the Open Market Desk at the Federal Reserve Bank of New
York, until instructed otherwise, to execute transactions in the System Open
Market Account in accordance with the following domestic policy directive:
“Effective September 27 November 9, 2018, the Federal Open Market
Committee directs the Desk to undertake open market operations as
necessary to maintain the federal funds rate in a target range of 2 to
2-1/4 to 2-1/2 percent, including overnight reverse repurchase operations
(and reverse repurchase operations with maturities of more than one day
when necessary to accommodate weekend, holiday, or similar trading
conventions) at an offering rate of 2.00 2.25 percent, in amounts limited
only by the value of Treasury securities held outright in the System Open
Market Account that are available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the
amount of principal payments from the Federal Reserve's holdings of
Treasury securities maturing during September that exceeds $24 billion,
and to continue reinvesting in agency mortgage-backed securities the
amount of principal payments from the Federal Reserve's holdings of
agency debt and agency mortgage-backed securities received during
September that exceeds $16 billion. Effective in October, the Committee
directs the Desk to roll over at auction the amount of principal payments
from the Federal Reserve's holdings of Treasury securities maturing
during each calendar month that exceeds $30 billion, and to continue
reinvesting in agency mortgage-backed securities the amount of principal
payments from the Federal Reserve's holdings of agency debt and agency
mortgage-backed securities received during each calendar month that
Page 9 of 11
November 7–8, 2018
Authorized for Public Release
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Class I FOMC – Restricted Controlled (FR)
exceeds $20 billion. Small deviations from these amounts for operational
reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon
swap transactions as necessary to facilitate settlement of the Federal
Reserve’s agency mortgage-backed securities transactions.”
In a related action, the Board of Governors of the Federal Reserve System voted
[ unanimously ] to approve a 1/4 percentage point increase in the primary credit
rate to 2.75 3.00 percent, effective September 27 November 9, 2018. In taking
this action, the Board approved requests to establish that rate submitted by the
Boards of Directors of the Federal Reserve Banks of . . .
This information will be updated as appropriate to reflect decisions of the Federal Open
Market Committee or the Board of Governors regarding details of the Federal Reserve’s
operational tools and approach used to implement monetary policy.
More information regarding open market operations and reinvestments may be found on
the Federal Reserve Bank of New York’s website.
Page 10 of 11
November 7–8, 2018
Authorized for Public Release
236 of 236
Class I FOMC – Restricted Controlled (FR)
Potential Actions of the Board of Governors of the Federal Reserve System
Potential Board actions associated with FOMC Alternatives A or B
Interest on required and excess reserve balances
Leave the interest rates paid on required and excess reserve balances unchanged at 2.20
percent.
Establishment of the primary, secondary, and seasonal credit rates
Approve establishment of the primary credit rate at the existing rate of 2.75 percent and
establishment of the rates for secondary and seasonal credit under the existing formulas
specified in the staff’s November 2, 2018, memo to the Board.
Potential Board actions associated with FOMC Alternative C
Interest on required and excess reserve balances
Raise the interest rate paid on required and excess reserve balances to 2.40 percent,
effective November 9, 2018.
Establishment of the primary, secondary, and seasonal credit rates
Approve establishment of the primary credit rate by the Federal Reserve Banks of [...] at
3.00 percent, effective November 9, 2018. This action will encompass approval of the
establishment of a 3.00 percent primary credit rate by each of the remaining Federal
Reserve Banks, effective on the later of November 9, 2018, or the date such Reserve
Banks inform the Secretary of the Board of such a request; the Secretary of the Board
would be authorized to inform each such Reserve Bank of the approval of the Board of
Governors upon such notification by the Reserve Bank. Lastly, this vote will also
encompass the establishment of the rates for secondary and seasonal credit under the
existing formulas specified in staff’s November 2, 2018, memorandum to the Board.
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@FedFRASER